Welcome to the Dürr Conference Call. Ralf Dieter, CEO, and Carlo Crosetto, CFO of Dürr AG, will give you a short introduction followed by a Q&A session. I will now hand over to Mr. Dieter, CEO of Dürr AG.
Good afternoon, ladies and gentlemen, and thanks for taking your time today. Ralf Dieter speaking here in Stuttgart, Germany, and Carlo Crosetto is today in Mexico, so we try to manage that between these two continents. Before we start answering your questions, I would like to give you a brief introduction about our top communication yesterday, which basically had a correction of the 2018 expectations and also for the midterm on 2020. The main reason for that was the effect which is caused out of the decision we took to discontinue the micro gas turbine business. This business we started, as some of you recall, in 2009 with the impression of rising energy prices and the demand for energy-efficient solutions.
In the meantime, we had to anticipate that by the given energy pricing today and also by the technical challenges we have to in developing this turbine, that we can't really afford to continue. The demand from the market is too low to get into volume as we originally planned, and also the technical challenges are calling for further investments in R&D, which we are not willing to take. We took that decision also in the light of the fact that by the closing of our acquisition of MEGTEC Universal, where we are together with our industrial air purification division, CTS, together we build a market leader for air purification worldwide, to concentrate on that and basically to leverage the synergies out of this acquisition to focus on that.
The second point was that the HOMAG situation, and I wanted to point that out. We are very happy with the development of HOMAG. Last year we had a record here, and this year will be more or less in the same range in all the numbers, but we had to take a measure in main plant shop floor where we mainly also are using the so-called systems business. Systems business, for you to understand, is not selling one or two machines to customers, which is a big portion of the normal business. Here, the business is where we sell whole lines to whole plants for further production, which not only takes a lot of space, but this business has tremendously increased. We are by far the market leader here worldwide.
Just two numbers: in 2014, when we took over HOMAG, that business was about EUR 160 million, and this year it will be another intake. Sorry, I'm a little cold. And in 2000, and also basically this year, this business reached an order intake volume between EUR 350 million and EUR 400 million. So it's doubling that business, which has led to the fact that our way of assembling and engineering and producing these systems needs some reorganization to be prepared for the further growth of that segment. And therefore, we took measures, and not only that we are reorganizing, we really reached the whole production system. We have external consultants working on that, and this will take some time, which will not allow us this year to grow to the level expected, and therefore also have a delta in terms of EBIT, which was part of the second message.
For 2019, we expect that the Dürr Group will grow in all figures, and we are set up for a year which is, in our terms, quite stable. We have a good pipeline in our automotive business, particularly on the paint side. The pipeline is much larger than two years ago, so we see a lot of opportunities, but the challenges with that we also discussed. I think that's a short introduction about our announcement yesterday. Maybe the last point is that we also revised our Strategy 2020, the strategy we formed in 2015, in the light of a paint business which was much more profitable than today, and also the hope to find the second HOMAG acquisition potential opportunity, which we have not found so far, and we don't see one on the short-term horizon here as well.
Therefore, we gave a new outlook for the company without a major acquisition. But I want to point out that this does not mean we don't want to do that. If we find tomorrow, six months, or one year from now, or one and a half years from now, a suitable acquisition, we will do that, but it's just to correct that expectation as well. So that's my introduction, and I would like to hand over to Ms. Falcone to guide us through the Q&A session.
Thank you. Then we will now begin our question and answer session. If you have a question for our speakers, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial zero two to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. We've received the first question. It comes from Ingo Schachel of Commerzbank. Please go ahead. Your line is now open.
Yes, thank you. I have three questions. The first one would be on your 2020 targets. I would say that the new set of targets looks like a very realistic, achievable set of financial targets. When you presented the last 2020 target in 2015, my impression has always been that you felt that you needed to articulate a vision and that you needed to articulate that Dürr is a high-margin growth company in order to be attractive for investors and employees.
What I want you to understand is the fact that you now go for a much more realistic set of figures, whether that means that you do no longer share this vision that you could be a 10% margin company at some point, or whether you might still think that conceptually there should be a 10% margin growth company at some point, even though this might be delayed by a few years?
Ingo, can I answer that one by one?
Yes, of course.
Thank you very much. First of all, I think the new target for 2020, as I said, is just to be clear, what does it mean without an acquisition? That's clear. I have not given up the vision, but we talk about 8%-10%, not 10%. I think we have the potential for that, but I think we wanted to do it on a realistic base. But as you know, the basis for us always is the platform of where we want to even do better. So we have not given up on that.
Okay. That's good to know. But a similar question on the M&A aspect of removing the M&A assumption that was in there, and it's fully understandable that you no longer include an M&A target in there. I'd like to understand whether it might also, at least to a certain degree, be interpreted as a slight shift in your enterprise M&A, maybe also after the integration of HOMAG, which you have realized that maybe it doesn't pay out to just pursue acquisitions for the sake of it, but that you want to be a bit more cautious there, or maybe also that a certain specific opportunity that you looked at, you've iterated recently, and that's that your removal of the M&A in there. Is there anything along those lines?
No, Ingo, thanks. First of all, HOMAG was the best acquisition we ever took and everybody undertook. We are very, very satisfied with what's going on. And the development, let's give you two figures because sometimes we forget the history. When we took over HOMAG in 2014, the order intake was EUR 800 million. Last year, we ended up with EUR 1.36 billion. This year, more or less the same level. The sales revenue was EUR 910 million or EUR 915 million. Last year, EUR 1.22 billion. This year, the same range. And the EBIT margin was 3.4%. Last year, 7.5%, which was a much faster development than we anticipated in 2015. So we are very satisfied with what's going on. We always said there's a lot of HOMAG to do, and there's also in the next year something to do.
We are still striving for, and I think HOMAG has the potential to be an 8%-10% EBIT company, no doubt. Our appetite for acquisition has not slowed down, but there are two things. It has to make sense, and I'm not willing to pay enormous purchase prices for businesses which are still today the multiples out there as long as we have this interest policy. But also, again, sorry, but also keep in mind, we just bought MEGTEC Universal for a very decent purchase price, in our opinion. And here we also have a company which has a lot of potential together with our CTS activities. So if such an opportunity comes, we will do it.
Thanks for the very comprehensive answer. Can I just ask a very quick one? Just because you reiterated all the top-line targets for 2018, just in terms of whether any top-line or development contributed to this guidance revision for 2018? Is there any pocket of weakness that you saw in August, September, beginning of October, in any of your segments?
No, not at all. The thing about our two systems, mainly paint business, close to EUR 2 billion. The order pipeline is double as it was two years ago, so there's a lot of potential out there. Yes, we are struggling with the margins, but you saw the improvements, and you will see further months coming in. So we see that also positive from 2019. That's why overall, for the company, we see that 2019 will be a better year than 2018. 2018 is not bad, it's just its effects, yeah.
Yeah. Thank you very much.
Pleasure.
Thank you. We have a next question. It comes from Sven Weier of UBS. Please go ahead. Your line is now open.
Yeah. Thanks for taking my question. I'll also ask one by one then. So first of all, I was just wondering now that you've probably closed the books on the order intake in Q3, if you could be a bit more specific whether you've seen a further sequential improvement in the HOMAG order intake and how the auto-related business has developed? So that would be the first question.
On order intake, as I said already, HOMAG will be more or less on the same level as last year. Roughly depends on some orders. But the automotive business, as I said, we have a good pipeline. The Q3 numbers will come out soon, but they are just a quarter, and we just got a large order in the fourth quarter to be booked. And so I think by year-end, we will see here also a good steady order intake development as we so far forecasted. There's no doubt there. There are challenges out there, but we discussed them in the last call. There's no news on that.
So you don't feel that? I think last time you spoke about the 40% increase in the pipeline on the automotive side. I guess that was the year-on-year comparison, and what you've just said was double like two years ago. So I mean, how do you see those current uncertainties? What kind of projects are we really talking about? Are these such key projects that you wouldn't think the OEMs delay those decision-makings easily, or how should we look at those? I guess it's a couple of really big ones that are constituting that doubling.
Yeah, but there are also we have, I think, you know the newspaper news about automotive have not much to do with what's going on on the investment front, yeah. We have a lot of players, and we do close business with those, particularly the EV area in China, very, very active and continued to be. But we also have a lot of major investments in replacing old equipment. So therefore, we see here a stable pipeline also for next year, and we don't see OEMs reconsidering all the investments because of the situation which we read in the newspaper. It's not the case. Oppositely, China's further growing. Even if they have a slowdown a little bit at the moment, but for an OEM to decide whether he builds a factory or not, he doesn't react on one or two months or one or two quarters.
They have a long-term view.
Yeah, but I guess you guys have underestimated the situations before, and then they make a full break when it's too late. So let's see how that goes. And just on HOMAG, you were speaking about obviously changing the process in terms of making the company better prepared for handling the system orders. What precisely are you changing, and how quickly does that go?
First of all, it doesn't go overnight. It's basically the production and supply chain in shop floor. And what it means today, we have a production system which is still geared to a lower volume and to, let's say, the traditional way how to build machines. And when this goes parallel with redevelopment or development of new machine, modular machine concepts, if we can produce here more in a series, inline, call it a flow effectively, and as well with the supply chain. A lot of changes in the procedures, the processes. We have a lot of training for the people, and as I said, this is guided by also external production specialists. So I think it's a big opportunity for HOMAG to become very efficient.
I think the work on that will go through the course of next year, but the effects will be slightly every month will be better. So we are optimistic for next year that we, with HOMAG, can also be back on an increase of EBIT up to 0.5% points.
And the last question, if I may, is just on MEGTEC. I guess there you were kind of previously saying it's in the short-term was like a 5% margin business, but when I look at the Q2 numbers of MEGTEC and Universal combined, they seem to have had an operating adjusted margin of over 8% and over 7% in the H1. So is that, I mean, you probably didn't have much chance yet to have a close look at their books now that the deal has closed, but would you say that you've underestimated maybe the profitability and its cost already from a higher level when you include it in your accounts?
I would not say that. As you said, we just have started to look into the company. We are now organizing the big synergy project. I think we have a good future here and there, and we are very optimistic to increase both margins on our side so far and on their side in a combined business environment. But it's too early to give here a clear run numbers on the guidance. I think give us a chance for next year when we come up with the guidance by the mission.
Okay. That's all from my side. Thank you.
Pleasure.
Thank you. The next question is from Alexander Virgo of Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Thanks very much. Good afternoon, gentlemen. I wondered if I remember correctly, your original HOMAG forecast or guidance was based on the premise of achieving a 35% market share in the early 2020s. I'm just wondering, what is it that's changed underlying in HOMAG to bring the sort of broader prognosis down? So I think you're now basically saying you're going to be growing in line with the market, sort of 3% or 4% CAGR.
No. Sorry to interrupt you. We don't say that. And I mean, first of all, market share for itself is not an objective, but in terms of the system business, our market share has increased a lot. That's why I said if the number. The system business has doubled in the last years. We have no different situation in HOMAG as before. All what we have is a singular plant problem, process problem we have to solve. And this is due to the fact that we have gone to that business in the last three years in that area, and that's all. The market growth for the mid-term we see here is always a 2.5% roughly. That's an indicator. It doesn't mean that we can't grow more than that. It depends on the situation, but I'm optimistic.
The measures we are taking now are preparing us for further growth, particularly in the system business, which is the industrial furniture production business, which is very positive also for next year.
All right. Okay, I think you recently were on a Bloomberg interview just before the call. I think you guided for about 50 basis points of margin improvement in HOMAG next year. Could I just check?
Up to, up to, yeah, you call it 50 basis points. I call it 0.5 improvement. Yeah, it's the same. Up to, I said. Yes.
Okay. And that's adjusted EBIT margin, is it?
No, it's the same. Whether it's adjusted or not, it's the same.
Okay. All right. Thank you.
Pleasure.
Thank you. The next question is from Alex Brozmann of DZ BANK. Your line is now open. Please go ahead.
Yes. Hello, Alex Brozmann. Thanks for taking my questions. For the first question, coming back to the reorganization from the production side of HOMAG, can you actually remind me or clarify a bit? Will this be completely done in 2018 until year-end, or is this, and I understand from one of the last questions, that this is also taking on in 2019? Is that right? When do you expect that to be finalized at the end? And also related to HOMAG, I understand there were also some further IT topics also related to SAP and amendments. Also on this side, when do you expect these to be finished now, given the new findings that you have?
Okay. Yeah, they are a little bit dependent, but mostly the reorganization of production takes also through next year. This is not a project for one month or three months. By the way, all these improvement measures are continuous improvement processes, so we would never say we are finished with that. We also do work on that every day, but this major reorganization changes the way how we assemble machines and how we get the supply chain organized, and this will take us through the course of next year. But as I said, it's a daily improvement, and therefore we see also 2019 here more positive. But the full effect of that will be 2020.
Okay. And on the IT side, anything to add on that, or is it exactly the same?
Of course, along with that, because we introduced SAP, that is very complex in that environment, and there will be also changes. But we are also changing our SAP here in Dürr all the time, so that's an ongoing activity.
Okay, so I understand that at the beginning of the year, there was a bigger push in that, and that was one of the reasons why you were not taking out as many as planned on the delivery side. But, okay.
No, no. Just want to be all right. It was in the beginning of the year we had a new production of SAP. We had no SAP in shop floor. We had an old system.
Yeah. Yeah.
It was also stopping us before we could have revenue. Yeah.
Okay. And the next question regarding Clean Tech, is there more to be cleaned up now, or is that now done, let's say, from the old legacy business point of view?
That is done with that. And just to remember, the energy efficiency business, where this cleanup was taking place, this was always relatively small activities. We cleaned up Cyplan already last year. When was that? Not Cyplan, sorry. Thermea last year. Carlo, Thermea. And we continue to do the ORC business, and Cyplan from the name, and the micro gas turbine is the one which we are now finalizing up, and that's done. We have no further demands on cleaning up things there.
Okay. Thank you, and last question. At the beginning, you made a comment from 2019 that you were seeing quite a stable year to come. On the other hand, you were speaking about some improvements on 2019. Maybe a clarification on that one. Was that a first indication for a guidance in 2019, or was it more an indication on the macro environment you're seeing, so basically, I want to know whether we can really think about a guidance which implies growth on all angles and all segments for the next year?
I don't want to give a precise guidance for 2019 today, but what I mean is a stable improvement. So we see that by all the measures we are taking, and the macroeconomic situation to forecast for 2019 today is difficult by all the changes we have everything. But I think it's quite stable from the economic environment. The pipeline for the automotive business looks good, and for HOMAG as well. So I think that's why we see that 2019 will be a better year for Dürr than 2018.
Okay. Also on the earnings side then?
Sorry? Also on?
Also on the earnings side, on the margin level of.
On all the intake, revenue, and earnings.
Okay. Great. Thank you.
Pleasure.
Thank you. We have a next question. It comes from Jack O'Brien of Goldman Sachs. Your line is now open. Please go ahead.
Hi. Good afternoon. Question from me is really, given your outlook into 2019, what operational improvements you can deliver in business? I think when we've spoken in the past, you've said that you lose some margin due to your cost base. So we'd be very interested, particularly within just the sort of opportunities you see there to support the margins in this background?
I mean, this margins or the cost base discussion, we had mainly the paint and final assembly division. Here, as you know, we are working on many initiatives to improve that. We see that already in the numbers, and we will see that also in the Q3 numbers, and we are optimistic for next year that we can improve that. On the application technology side, we are stable. That's most part of the automotive business. On the Schenck side, it's also stable. We are optimistic that we can improve here operationally next year.
Okay. And just one more on, you mentioned the H1 results, some supply issues within the industry for HOMAG, and obviously you've talked. Is that sort of partly related to the SAP, or is that something different? And where do you see that today? Do you still see some tightness?
Yes. It's a complex answer, but I'll try to make it short. The supply issues we had, like many other machinery companies, that seems to be that it loosens up a little bit, but also by the complexity of our production system. We created our own shortages here in terms of forecasting capability, and that's what we are working on. That's a complex program, but at the end, we have a more streamlined production, which we have a higher output on the same space, the same people, and a better supply chain. Those are our suppliers have a better visibility when we need what. That's all.
Okay. Thank you.
Pleasure.
Thank you. The next question is from Christoph Laskawi of Deutsche Bank. Your line is now open. Please go ahead.
Hi. Yes. Thank you for taking my question. The first one would be on HOMAG again. You guided for essentially a margin of improvement of up to 50 basis points into next year. I was wondering, is that largely then fixing the issues that you have with the system business or underlying improvement of the business as well? And you guided for around 10% negative this year. Is there also a number you could point to in 2019? As I understand, those measures will partially be ongoing into next year as well. Or would you say it's not even close to the million that we see this year, so we should largely ignore it?
The first part I can easily answer. The second, you have to help me again. But the first one is clearly the improvement. For sure, it comes out of shop floor production plant and mainly the system business, but it also relates to improvements because the production system is not only for the system business, but we also improve our Schenck machine business. So it comes from all aspects, but mainly from the system business.
Yeah, Ralf, I think I can answer the second question. I think we were indicating that we have about EUR 10 million impact on the profit of HOMAG for this year, and the question was, is this going to affect this 50 basis points next year? No, I think what we've indicated is in terms of improvement would include potentially some of these additional costs to improve the production process in shop floor. So the improvement is not before additional expenses, let's put it this way. So we are expecting the reported EBIT to improve ideally up to 50 basis points next year.
Perfect. Thanks. You commented on the order pipeline in autos, especially with the paint and final assembly. Are you willing to give more color on pricing as well? We've discussed in the last calls, and you indicated stabilization of the pricing environment simply because you can now choose better because the pipeline is so improving even further as we speak, or is it largely a flattish and you would expect that to improve more into next year?
I think the order pipeline has their volume and quality not changed compared to the last call we had. The main issue is that we can be more selective, and we are more selective. Therefore, the improvements on all the EBIT margins, and you will see that also in our numbers.
Okay. Thank you. And last more housekeeping question is on MEGTEC. Could you remind us what the PPA charges you would expect on a yearly basis going forward from the transaction?
Yeah. Ralf, do you want me to take this?
Yes, please.
Yeah. So the PPA effect for HOMAG in 2018, I mean, is still being finalized. It should be in the range of EUR 5 million. And next year, we are right now estimating about 15.
All right. Thanks a lot.
Thank you. The next question is from Gordon Schönell of Bankhaus Lampe. Your line is now open. Please go ahead.
Just a little correction. I think, Carlo, you mixed up with MEGTEC the PPA numbers. HOMAG, we have EUR 8 million, and also next year. I think the numbers you gave were for MEGTEC acquisition.
Yeah. I understood the question was for MEGTEC, but if we include HOMAG, then you have to add another EUR 8.7 million-EUR 8.8 million.
Yes. Okay. Sorry. Next question.
You may ask your question now, Mr. Schönell.
Yes. Thank you. One question is on HOMAG, and on your Bloomberg interview, in this Bloomberg interview, you mentioned revenue growth for HOMAG in 2019 of around 3%-5%. Frankly speaking, this sounds a bit disappointing to me. Your guidance for 2018 for HOMAG suggests a book-to-bill ratio of clearly above one. Your order backlog at the beginning of 2019 should be much higher than the beginning of 2018. I had expected at least 5% growth for HOMAG. Why are you so cautious indicating only 3%-5% revenue growth for HOMAG in 2019? This would be my first question.
Because I'm cautious. You know the market is not growing much, so we have opportunities, but it will be now in October too early to predict more precisely next year. But we see the potential in that range. Maybe it's more. Let's hope so.
Okay. Then I could already expect your answer on my second question because it's on your 2020 targets for your group revenue. So you indicate EUR 4 billion-EUR 4.2 billion. Yeah. Your guidance for 2018 suggests roughly EUR 3.8 billion. So if I add the M&A impact of roughly EUR 150 million for 2019, that already brings you close to EUR 4 billion. So again, why are you so cautious on 2020? You highlighted the strong pipeline in your paint shop business. So is this again just to, yeah, take the expectations down in order to be able to surprise positively in the future after a lot of disappointments, or what's your intention?
First of all, I would like to ask you back how many disappointments you had from Dürr. I think for the last 10 years, not many. But.
Yeah. You're right. So you had a couple of good years, but the last one or two years were some disappointments. But anyway.
Okay. That's another discussion. We don't see that. But no, we want to be in the forecast in a way that we are sure that we can make that, and we'd rather surprise you than disappoint you again.
Okay. Good. Thank you.
We have another question. It comes from Jasko Terzic of Bankhaus Metzler. Your line is now open. Please go ahead.
Yes. My first question is on HOMAG, and could you help me out to understand what really triggered now the revision of the guidance, taking you back to your second quarter conference calls where you sounded to me at least very convinced that you can make it up. So what exactly was the problem that has now triggered the revision?
The basic problem was the strong order intake in system business, showing really then more clear than ever that we have to take those measures. We are working already, as you know, in HOMAG for some years on improvements in every corner, and that's the beauty of HOMAG, that we still have a lot of areas where we can improve. But the volume of the system business and the demand, the delivery times really had it not allowed to have continuous improvement. We need to make a fundamental change how we do things there in shop floor, and that was the decision we took.
Okay. And then also on the issue.
So what we are doing now was already planned one year ago, but we had not the chance because we had so many orders. We just jumped on to get the business out of the door, but now it's time to do that, and that's why we took that decision.
Okay. Thanks. And the second one is also on the systems part. If I remember correctly, you were already planning that you improve the systems business, and hence it now looks like you have to undergo a severe change. What was the wrong planning, or was it not planned to have such volumes, or what was the issue then?
The surprise was the volume because when we took over EUR 160 million in 2014, we anticipated that this grows, but not in such numbers, and now it's doubled in a few years, and that we did not anticipate. Absolutely not.
Okay. Thanks. And then for the improvement next year of up to 50 basis points, the current guidance revision is between 100 to 150 basis points. So what is missing next year? Does it take much longer to get back to the efficiencies you saw at the beginning of the year?
But if you like, by the measures we take, we have basically, if you like, that area in a year delay, basically. That's adding up in about two years.
Okay. And then also on HOMAG 2020, my impression was that the upper end of the guidance should more or less be very tangible already in 2019 or slightly close to it, and now it looks like you became much more cautious regarding 2020 on HOMAG. Has that to do with your process changes and that you don't seem to be more that the market is capable of doing a 10% business?
No, it's not only more than that, but also I think the market's outlooks are that the growth of the furniture production in the next year is lower than in the last two years. And that also means that our growth objectives are also needing to capture market share. I mean, we want to have more market share. That's maybe not always supporting increase of margins. It's the opposite. Therefore, we are a little bit more cautious because we are the market. We want to do that, and we want to continue to grow also our market share. That's not a number one objective, but it's a clear objective for us.
Okay, and the final one is on your plan to not go for acquisitions, but you don't see currently any. If I remember correctly, you said that if you don't see acquisitions in 2018, a buyback or higher shareholder distribution is likely to get on the agenda. Could you give us an update on that one?
I can hand over to Carlo with that because we don't have this on the agenda. It doesn't mean if it would make sense to some client, then we would discuss it, but we don't have it, let's say, on the top of our agenda today. Carlo, would you want to elaborate on that?
No, I think you've said it all. I mean, it's certainly something that we will probably be reviewing again, but there is no decision one way or the other at this stage. I think we were in the last days concentrating on these issues we are discussing today, and we also wanted to give a guidance for 2020, which does not include a potential M&A simply because it cannot happen. It can happen this year, next year, the year after. So we just thought it would be better. But of course, we have a lot of cash sitting there. We still have a positive net financial status at year-end planned, so we can probably look at that. But please remember that most of our cash is borrowed, and we just need to look at this separately in the next weeks.
The decision to currently not see any M&A has not increased the likelihood of a buyback?
No.
Yeah. It's either increase. It didn't increase. It didn't decrease. I mean, as I said, it's been a priority in the last few weeks for us to discuss, and I don't want to make any comment at this stage if it can be or it cannot be. I think it's just too early.
Okay. That's helpful. Thank you.
Thank you. We've received another question. It comes from Peter Rothenaicher of Baader Bank. Your line is now open. Please go ahead.
Yes. Hello, gentlemen. One question regarding your adjusted expectation for the new position. So it's down versus your previous guidance. What is the reason? Has it to do with the payment terms and for OEMs, or is it also related to HOMAG? Yeah.
Carlo, can you take that?
Yeah. I think it was about net financial status, your question, correct?
Yeah.
Just to be clear. Yeah. I mean, compared to the previous forecast, you have to, of course, deduct the acquisition of MEGTEC, which is EUR 110 million. Then you have, of course, the acquisition, the increase in the HOMAG shares that, of course, we didn't plan at the beginning of the year. And then you have a remaining gap that is correctly related to a tighter and more difficult discussion with our customer, especially in the OEM, in the automotive business. So that's partly the reason for that, yes.
To be clear, in terms of what did you take into the adjustments for your adjusted EBIT margin compared to the reported? Is it only then the EUR 17 million for the discontinuation of the gas turbine business, or would this include this as well?
Well, it's definitely the EUR 17 million for the micro gas turbine discussion. It's also the expected PPA effects and some of the integration costs of MEGTEC Universal in the CTS business, as I was referring to before. And then, of course, we have certain expenses related to IT or project optimization, focus, etc. So it's a combination of these, yes.
Okay. But apart.
And PPA.
Apart from the PPA at HOMAG, you have no corrections at HOMAG, huh?
No. It's in the HOMAG results.
Yeah. The small ones, it's a small EUR 2, 3, 4 million, but not more.
Okay. Thank you.
In this area.
Thank you. We have another question. It comes from Patricia López of Credit Suisse. Your line is now open. Please go ahead.
Yes. Good afternoon, sirs. Thank you for taking my question. It's all related to your HOMAG outlook. I'm surprised about how conservative your guidance is for this area. Maybe I'm missing something. I would like perhaps to double-check with you. Based on your comments, the market is okay and growing. You're preparing the company to take future growth potential, especially in the system business, and you're having a high market share, 30%-35%, maybe globally. And some listed players you are competing with in certain areas are showing a higher margin that HOMAG is supporting today. So what is the reason really to become so cautious for 2020? I think I'm missing a part here. Thank you very much.
My pleasure. And I can help you because the competition you're talking about is in Italy, I guess, and.
Yes. That's right. At least in partial certain areas.
Yes. And this company has a big chunk of its business. It's a component business, which is highly profitable where it comes from.
Yeah. Yeah. Okay.
This component business, they sell to other market members and even to competitors, and this is in the minimum double in terms of margin. Although in Italy, I've learned the wages are lower, but maybe that's another reason. It doesn't mean we can get there, but it gives us a chance. We will continue to incorporate it with Italy, but we will not reach that because their portfolio mix is a different one.
Yeah. I understand, but what about the rest of the arguments? The market growth, bring yourself for this jump in the system business area. Why not being a—I don't know. I struggle to see why the margin in HOMAG should remain so conservatively guided.
Because we wanted to give you a baseline, and we are conservative, and I think it's better to have this as a baseline than a guidance which is too optimistic.
Okay. Thank you very much.
My pleasure.
Thank you. We have a next question. It comes from Stefan Augustin of Equinet Bank. Your line is now open. Please go ahead.
Hello. Thank you. The question is on HOMAG and discussing you have been set and outlined in the Q2 call for how to reach the scale target. We also like this to having the systems business. We also wanted to sell smaller machines and machines on stock. So when we now do not reach our sales target, is it that I have to think of that the systems business is now even lower because you introduced the overhaul of the production line, delaying more the revenue generation in the systems business? Or is it more that we didn't have been able to sell the smaller machines?
No, it's not. It's a small machine business or a single machine business at the same level like last year in order intake. The sales at the moment is not a function of order intake. It's a function of order. Yeah. We have enough orders to make more sales, but it's due to the capacity constraints and shop floor, mainly, as I explained, and that we have to fix that to have a higher throughput there. Then it's easier to grow the top line as well again. It's not on the market.
Your initiative to sell the single machines works as it has been expected in Q2?
It's also an area of competition. We have the same level last year, although we are increasing that because we have new offerings for the smaller customers, which are Industry 4.0 and very much under the spotlight. So we see that we also in that area can increase our market share, and that's what we are focusing on now as well with a special task force. But I hope that the competition is not listening now.
All right. Thank you.
Thank you. As there are no further questions at the moment, I would hand back to you, Mr. Dieter.
Ms. Falcone, thank you very much for guiding us here. And first of all, I think we had a lot of questions. Thank you very much. And I hope this gives you some more clear light on this announcement. First of all, thanks for participating on short-term notice. And I just get this information that the 8th of November, that's the next time we talk to each other, which is pretty soon, but then we can talk about the third-quarter results. And I think you will ask me then a lot of questions about the outlook for the year. All right. Thank you for joining us, and speak to you soon again. Carlo, thanks.
Thank you very much, everybody.
Ladies and gentlemen, thank you for your attendance, and this call has been concluded. You may disconnect.